TORONTO - The Canadian dollar closed lower Tuesday as the greenback advanced alongside rising U.S. Treasury bond yields on nervousness about whether the U.S. can dodge a potential default.

The currency had been higher during the morning on optimism that the U.S. was edging towards a debt deal that would head off a default and reopen a partially shuttered American government.

The loonie was off 0.24 of a cent to 96.34 cents US as the U.S. Treasury Department’s three-month and six-month bills sold at a higher-than average yield.

The US$35 billion of three-month bills sold at a high rate of 0.13 per cent, well above the 0.035 per cent paid to sell the notes a week ago. The Treasury sold $30 billion in six-month bills at a high rate of 0.15 per cent, compared to 0.06 per cent in last week's sale.

Senate Majority leader Harry Reid and Republican leader Mitch McConnell had come close to sealing an agreement that would reopen the government through Jan. 15 and permit the Treasury to borrow normally until early to mid-February.

But Senate negotiations stalled during the afternoon on uncertainty over what Republicans in the House of Representatives would propose.

The Senate plan is a far cry from the assault on Obamacare that Tea Party Republicans originally demanded as a condition for a short-term funding bill to keep the government fully operational and a further increase in the debt ceiling.

Markets have been rattled lately because Democrats and Republicans have been involved in a bitter fight about raising the debt limit, which will be reached on Thursday. At that point, the U.S. government would start to run out of money to pay creditors.

At a late-morning news conference, Republican House Speaker John Boehner did not mention a specific piece of legislation, saying "we're speaking with our members, trying to find a way forward."

The loonie also moved lower amid a report from a London-based economic organization that the currency is trading at a far higher level than it should.

World Economics said at current levels of about 96 cents US, the loonie is still about 10 per cent higher than it should be, based on the currency’s purchasing power.

Commodities were mixed after optimism over reaching a U.S. debt deal sent prices higher for copper, oil and gold on Monday.

The November crude contract on the New York Mercantile Exchange was off $1.20 at US$101.21 a barrel, its lowest level since early July.

December copper was unchanged at US$3.31 a pound while December bullion declined $3.40 to US$1,273.20 an ounce.